Prudential Financial mulls Taiwan exit amid tough market

Prudential Financial, which has been operating in Taiwan for 30 years, is considering a plan to leave a market that is presenting heightened industry risks alongside ongoing regulatory changes.

The US-based insurance giant is exploring strategic options for its Taiwan insurance business, which may include a sale, a company spokeswoman told AsianInvestor. She declined to comment on the details of potential business transactions or the reasons behind the decision.

Local media reported last month that the insurer would likely sell its life insurance unit in Taiwan by the end of this year. The firm has touched base with the Financial Supervisory Commission (FSC) and approached potential buyers, which may include domestic financial groups.

As of September last year, Prudential Life had total assets of NT$177 billion ($5.9 billion) in Taiwan, ranking it 16th in size among the island's 21 life insurers.

Prudential Life’s exit plan is not really surprising; it had always just been a matter of time – after all, Taiwan is a small market for such a giant player, the Taipei-based general manager of a global fund house told AsianInvestor.

Domestic players are strong in Taiwan, while foreign players need to fulfil the requirements in their home countries as well as those in Taiwan, he said, and the local regulator does not have favourable policies for global insurers, either.

Moreover, Taiwan life insurers’ industry risk is relatively higher than that in other markets in Asia Pacific as their capital positions are weaker, Serene Hsieh, director for financial services ratings at S&P Global Ratings, told AsianInvestor.

The difference between insurers’ liability cost (mainly the rate it pays to policy holders) and investment yield on the asset side is also more pronounced than in other countries. This negative interest spread is about 50 basis points to 100 basis points for Taiwan insurers, she added.

Insurers in Taiwan invest about 65% of their assets overseas so they have high foreign-currency risk. Across the whole industry, about 8% to 9% of the total investment assets are exposed to unhedged currency risks, Hsieh said.

A number of large players have already pulled out of Taiwan. Netherlands’ ING was acquired by Taiwanese financial giant Fubon for $600 million in 2008, AIG sold its stake in Nanshan Life for $2.16 billion in 2011, and Yuanta Financial bought New York Life's local subsidiary for NT$100 million in 2014. 

Major foreign insurers still operating on the island include Hong Kong-based AIA, German group Allianz, France's BNP Paribas Cardif and UK-based insurer Prudential.

TOUGHER RULES

Prudential Financial’s move to exit Taiwan comes at a time when the local regulator is introducing changes on multiple fronts.

The Financial Supervisory Commission (FSC) said in October that it has commissioned the Taiwan Insurance Institute (TII) to study a proposal to introduce a tiering structure in domestic insurers’ capital, in order to strengthen their capital positions.

This will mean that insurers may have to adopt a new capital structure and, as a result, are likely to become more prudent in their investment decisions.

“Banks have tier 1 and tier 2 [in their capital structure but] it’s mixed together for insurers. We are moving in the direction of tiering in the future,” Chang Chuang-chang, vice chairman of the FSC, told AsianInvestor in October last year.

The FSC is also planning to introduce an additional capital adequacy requirement for domestic insurers next year that would overhaul their solvency regime.

It has proposed a new metric to evaluate an insurer’s capital adequacy to strengthen their ability to bear risks. The new metric – the ratio of net assets over total assets – will be used together with the existing risk-based capital ratio.

Insurers will be required to strengthen their capital base if their net assets to total assets ratio falls below 3% for two consecutive six-month periods.

Moreover, new rules were also introduced to curb insurers’ investments into Formosa bonds and bond exchange-traded funds. Regulators have also been discouraging the launch of savings-type or short-tenor insurance products, Hsieh said.

The regulatory environment has been evolving in Taiwan over the past two years as the FSC seeks to reduce risks in the industry, she added.